Trade-based money laundering (TBML) is a technique employed by criminals to launder the proceeds of their unlawful activities through the global trade network. This method involves manipulating trade transactions, particularly invoicing, to conceal the actual source of funds and present them as lawful earnings. TBML can manifest in various ways, such as inflating or deflating goods’ prices on invoices, misrepresenting goods to evade customs duties, and utilizing counterfeit shipping documents. Through these tactics, criminals can integrate the gains from their illegal ventures into the legitimate financial system, complicating the efforts of law enforcement agencies to trace the origin of these funds.
How Does Trade-Based Money Laundering Work?
TBML typically encompasses three primary stages:
1. Placement: During the placement stage, the criminal injects the proceeds of their illegal activities into the legitimate financial system. This is often achieved by inflating the value of goods in a trade transaction, such as engaging in over-invoicing, thus generating an artificial profit that can be transferred to a foreign bank account.
2. Layering: In the layering stage, the criminal severs the illicit funds from their original source by constructing a complex network of transactions. This may entail using counterfeit invoices, misrepresenting goods, and establishing shell companies to obscure the true owner of the funds.
3. Integration: During the integration stage, the criminal reintroduces the laundered funds back into the legitimate financial system, making it arduous for law enforcement agencies to trace the origin of the funds. This could involve employing bank transfers, investing in real estate, or purchasing high-value items, such as artwork or luxury vehicles.
What Are The Financial Crime Risks in Trade Finance?
In order to effectively identify and deter TBML, it is crucial to be familiar with the risk indicators associated with this form of criminal activity.
Some of the most prevalent TBML risk indicators include:
1. Price Discrepancy: Significantly varying prices between the goods listed on the invoice and the prevailing market price for similar goods.
2. Volume Discrepancy: Noticeable differences between the volume of goods indicated on the invoice and the actual volume of goods being shipped.
3. Quality Discrepancy: Discrepancies between the quality of goods shipped and the quality described on the invoice or accompanying documentation.
4. Structural Complexity: Utilizing intricate trade structures, involving multiple intermediaries, shell companies, or other entities to obscure the flow of funds and make tracing difficult.
5. Trade-Based Techniques: Implementing techniques like over-invoicing, under-invoicing, multiple invoicing, over- or under-shipment, and misrepresentation of quality—commonly employed in TBML.
6. Lack of Economic Rationale: Transactions lacking an apparent economic rationale, such as trade between countries with no previous trade relationship or trading goods with no demand in the destination country.
7. Political or Economic Instability: Involvement in transactions with countries or regions that are politically or economically unstable, which can be utilized to mask illegal proceeds.
8. Suspicious Financial Behavior: Involvement of parties with a history of questionable financial conduct, including money laundering, sanctions violations, or other financial crimes.
9. Licensing Requirements: Difficulty in determining whether a trade transaction requires an import or export license, potentially increasing TBML risk. Seeking guidance from specialists can aid companies in understanding licensing requirements in their jurisdiction and foreign countries, promoting compliance and minimizing risk.
These are just a few examples of TBML risk indicators that financial institutions, governments, and other organizations should be vigilant about in their efforts to detect and prevent this type of crime. It’s essential to acknowledge that TBML is an ever-evolving threat, and risk indicators may change over time as criminals adapt their methods to evade detection.
